Grappling With the Cost of Corporate Gadflies

Corporate America is being held hostage by three people you have probably never heard of.

The three people — John Chevedden, William Steiner, James McRitchie and their families — specialize in bringing shareholder proposals at annual meetings, urging companies to change their compensation practices or improve their corporate governance.

These three are a force unto themselves. Together, they accounted for 70 percent of all proposals sponsored by individuals among Fortune 250 companies this year, according to a new study by the Manhattan Institute.

You might ask, so what? Shouldn’t everyone be allowed to speak their minds?

Well, that might be true in most situations. But these proposals are costing companies tens of millions of dollars and creating big fights in the courts and at the Securities and Exchange Commission.

Yet, these three seldom own more than a few hundred shares of the companies they challenge.

It’s a strange situation where, as Mr. Chevedden told me, he may make “only pennies” but the companies are forced to spend so much more.

The question is whether these proposals are doing more harm than good for all the shareholders. If so, perhaps it is time to put an end to the personal crusade of a few against corporate America.

It is not new for individuals to seek fame, and perhaps fortune, through shareholder proposals. The doyenne of this business is Evelyn Y. Davis. Mrs. Davis first started at IBM’s annual meeting in 1959. Since then, she has brought 20 to 25 proposals a year, a full 14 percent of proposals from 2006 to 2014 among Fortune 250 companies, according to the Manhattan Institute.

Only 1 percent of her proposals succeeded during that time. However, the business was remarkably lucrative for Mrs. Davis. She encouraged companies to buy numerous copies of her annual newsletter, Highlights & Lowlights, at $600 each. She was reported to earn up to $600,000 a year. The newsletter was about 20 pages and mostly talked about how great Mrs. Davis was, with lots of pictures. But that was the price to keep her from haranguing chief executives at shareholder meetings. Sometimes it took more — Ford gave her a new Jaguar X-Type sedan.

Mrs. Davis is in her 80s and retired for now, but Mr. Chevedden, Mr. Steiner and Mr. McRitchie are more than taking her place.

This new generation does not appear to be in it for the money. Mr. Chevedden, who lives in Redondo Beach, Calif., started after being laid off from Hughes Aircraft, and his first target was its parent, General Motors. Mr. Chevedden submitted a proposal to get G.M. to disclose more information about its employment practices at Hughes. Mr. McRitchie, who lives in Elk Grove, Calif., writes about these issues at corpgov.net and often acts with his wife, Myra. Meanwhile, Mr. Steiner, who is based in New York, started in the 1980s and has brought his son Kenneth into the family business.

The big kahuna here is Mr. Chevedden. He brought 30 percent of all proposals among Fortune 250 companies this year and was the biggest submitter of anyone in 2014 for all companies.

And what does Mr. Chevedden want? Unlike Mrs. Davis, who focused more on compensation and other social issues, Mr. Chevedden has been riding the wave of good corporate governance. His proposals concern how shareholders should vote, like allowing them to act by written consent rather than at a meeting. Mr. McRitchie and the Steiners focus on similar issues, though with nuances. The Steiners, for example, seem to focus more on issues centered on special meetings and action by written consent.

So what could be so wrong about this?

Well, most of the proposals this year have failed. According to the Manhattan Institute, of Mr. Chevedden’s 32 proposals, only one passed. Of the Steiners’ 28 proposals, three passed. And Mr. McRitchie and his wife had two proposals pass, out of 15.

The big three had miserable success so far this year, but companies spent millions dealing with these proposals. One estimate puts companies’ costs at $87,000 for each proposal, or more than $90 million a year, meaning that these three activists are costing companies tens of millions of dollars.

And these three don’t go away. AutoNation has been singled out by Mr. Chevedden for 14 consecutive years. Mr. Chevedden, who, according to AutoNation, owns “no less than” 100 shares of its common stock, the minimum required to submit a proposal, resubmitted a proposal to split the company’s chairman and chief executive role.

Companies are also suing in response to the constant stream of proposals from these three and their murky sponsorship as they team up or bring proposals on behalf of others. Waste Connections, the Apache Corporation and KBR have all sued Mr. Chevedden, seeking to prevent him from bringing corporate proposals.

And the fights break out not just in court but at the S.E.C. The law firm Gibson, Dunn & Crutcher reported that from Oct. 1, 2013, to May 31, 2014, the S.E.C. responded to 286 requests to review proposals and excluded 161 of them, or 71 percent.

So what is the good of these proposals? Well, the three activists argue that they believe in effective corporate governance. The Corporate Crime Reporter interviewed Mr. Chevedden and asked him why he did it. One reason, he said, was for the thrill. Another was to improve “the governance of the companies.” When I spoke with Mr. Chevedden and asked him to comment on the Manhattan Institute report, he reiterated that his activism “gives shareholders more of a say” and potentially puts management on its toes and prevents it from lapsing into complacency.

Some of these proposals may have merit, and certainly they are part of a big shift in corporate America’s governance. When I spoke with Mr. McRitchie, he told me that “we can’t put cops in every boardroom,” but he and his cohorts “hold our institutions accountable.”

Kenneth Steiner echoed this sentiment to me, saying that Manhattan Institute report was without support. He added that he was acting altruistically for all shareholders because the mutual funds would not bring these proposals “because they can’t lose access” to the companies’ management.

Some of these proposals may have validity, but perhaps it is time to stop the perpetual reintroduction of proposals that AutoNation and others have experienced and are never passed.

Under current rules, anyone who owns at least $2,000 worth of a company’s stock for a year can file a proposal. If proposed once, it can be resubmitted as long as it has received 3 percent or more of shareholders’ votes during the last five years. There is an escalating scale, so, for example, a proposal has to receive at least 10 percent of shareholders’ votes if it has already been proposed three times in the previous three years.

The rule is so liberal that the Chamber of Commerce and the National Association of Corporate Directors recently asked the S.E.C. to make it stricter and end the merry-go-round of proposals.

It seems a sensible start. These activists may be interested in the governance of companies, but it is unclear that the costs are worth it. This is particularly true when large shareholders don’t support them from the start.

And so, the question really should be: How far can these activists go?

Tightening restrictions might end the fun for Mr. Chevedden and his group, but perhaps repeated proposals should require a much higher economic incentive. Even in a democracy, one proposal may be a good thing, but 14 in a row over 14 years may not.

A version of this article appears in print on 08/20/2014, on page B1 of the NewYork edition with the headline: Grappling With the Cost of Corporate Gadflies.